Viewpoint: Potential ship slowdown may alter dry trade

Many dry bulk shipowners will have to slow steam their fleets for their vessels to achieve a passing rating in the International Maritime Organization's (IMO) Carbon Intensity Indicator (CII) regulation that takes effect on 1 January 2023, potentially disrupting a dry bulk shipping segment hampered by geopolitical turmoil and a sagging global economy.

The insufficient availability of alternative fuels, as well as ships equipped to utilize them, means that to score a passing rating on the CII, shipowners of older, less fuel-efficient fleets are likely to choose to slow their vessels.

A relative lack of dry bulker newbuildings has caused the global fleet to age considerably in the last decade. The number of vessels on the water aged 11 years or older is nearly double the amount in 2010, comprising nearly half of the entire fleet.

Shipowners are waiting for new technologies and legislation to force their hand into scrapping older vessels with carbon-intensive engines as steel prices associated with scrapping remain low compared to a strong secondhand market.

Reducing the average speed of a Supramax bulker to 12 knots from 14 knots adds six additional voyage days when traveling from the US Gulf coast to China. This would theoretically raise the CII rating for the bulker to a B rank, up from a failing E rank, according to Argus calculations. The extra time spent traveling will block tonnage from replenishing global supply as quickly, which could shrink the available global fleet and boost freight rates as a result.

A hike in dry freight costs may reduce arbitrage opportunities on long-haul trades, leading buyers to take advantage of nearby suppliers.

The extent to which dry bulk vessels opt to slow steam next year will depend on how incentivized shipowners are to receive passing ratings for their ships. There is no clear penalty for CII non-compliance.

Low bulker demand plagued 2022

Reduced Chinese steelmaking demand amid the country's ongoing real estate crisis was a major reason for a downturn in dry bulk demand in 2022. Iron ore tonne miles, the major driver of Capesize demand, fell by 5.1pc in the first nine months of 2022 from a year earlier.

The lack of Capesize demand caused by China's inability to shake its Covid-19 lockdowns to get production back spurred the segment to compete for smaller Panamax-sized cargoes when South American grain demand put upward pressure on transatlantic Panamax rates. On 28 March, the $/t rate for a Capesize on the US east coast-Rotterdam route was about half the rate for Panamaxes making the same journey. The increase in competition for these cargoes helped put downward pressure on Panamax rates in the process, dropping to near parity by 15 June.

Weak Capesize demand, alongside reduced global congestion which added to the tonnage glut, pulled $/day earnings for the segment below operating expense levels, leading shipowners to lay up some vessels in early September instead of operating at a loss.

Chinese GDP growth is projected to increase by 4.4pc next year after lower than expected 3.2pc growth in 2022 largely caused by the strict Covid lockdowns and the real estate crisis, according to October estimates from the IMF. An increase next year in steelmaking demand from the country's real estate sector may provide support for Capesize rates.

By Ross Griffith